Home Sales Slump

A quiet week has been punctuated by a horrible report for sales of new homes. They slumped 33% in May to a record low annual rate of 300,000. That’s simply rotten.

There is growing concern amongst policy makers that the recovery is weakening and may even be reversed. The odds of a double dip recession, which had almost completely disappeared late last year, are now back at uncomfortable levels. That means we cannot contemplate any actions that undo the stimulus. So policy shifts designed to reduce the Federal deficit would be highly inappropriate right now. However attractive it might be to advocate ‘fiscal rectitude’ any such policy would run the very high risk of plunging the US back into a downturn. This would jeopardize the very reason fiscal conservatives cite as the basis for their policy: Federal debt would accumulate even more quickly as tax revenues drop again and the annual budget gap would widen even further.

It is crucial that we remain focused on the causes of our Federal deficit: the current crisis has contributed much less than half of the budget gap. The decline in tax revenues that resulted from the sharp in activity will correct itself as GDP starts to grow again. What will not recover is the permanent drop in Federal revenues created back in 2001 and 2003, and the unsustainable trajectory of health care costs. These two problems are the core of any future budget gap resolution.

Meanwhile, today’s housing report tells us that the economy is a very long way from a healthy path. Clearly low interest rates and even the modest recovery have not been enough to reverse the devastation wrought by the bubble. Unfortunately so much of the growth we experienced during the last ten years was based upon the bubble – construction jobs accounted for a vast percentage of all jobs created, and the illusion of home price inflation fostered a false sense of wealth sufficient to drive consumption even though wages were weak. There is nothing in the economy strong enough to provide that kind of power. So we have to rely on a more generalized recovery, which is likely to slower and more shallow.

Things remain bumpy.